Profit From Mexico's Brew Brouhaha

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Investors in Mexican brewer FEMSA (NYSE: FMX) are waiting for two big events that could significantly affect the company's stock price. Mexico's No. 2 beer company, whose proper name is Fomento Economico Mexicano, is silent on one issue and vocal on the other.

Referring Wednesday to the "prolonged weakness" of the Mexican beer market, FEMSA warned of "even more hurdles," including the prospect of higher beer taxes next year. Mexican Senate committees have approved taxes on beer, tobacco and gambling in an effort to raise revenue.

But FEMSA said little about the possibility of making a deal for its beer division. It simply repeated comments made four weeks ago: It is talking to "several parties to explore opportunities" involving its beer business.

Predicting a buyer
The most likely suitors are SABMiller (OTC BB: SBMRY) and Heineken (OTC BB: HINKY). SABMiller has made some acquisitions in Latin America, and Heineken distributes FEMSA brands, such as Tecate and Dos Equis, in the United States.

In Mexico, FEMSA ranks a solid second in a two-brewer contest with Grupo Modelo. Anheuser-Busch InBev (NYSE: BUD) owns 50.2% of Grupo Modelo, but the world's biggest brewer doesn't have operating control.

Given Anheuser-Busch InBev's financial power, FEMSA, especially with its beer business, could be vulnerable to deal-making. It must contend with a weak Mexican beer market and with the fact that it is a much smaller player in Brazil, where AmBev (NYSE: ABV) is the dominant brewer. AmBev is controlled by Anheuser-Busch InBev.

Business goes on
FEMSA's strongest sources of growth are its Oxxo chain of convenience stores and its majority stake in Coca-Cola FEMSA (NYSE: KOF), the largest Coca-Cola bottler in Latin America and the second-largest in the world. Coca-Cola (NYSE: KO) owns nearly one-third of Coca-Cola FEMSA.

During the quarter ended Sept. 30, operating earnings for Oxxo rose 55% above the year-ago quarter, while operating earnings for Coca-Cola FEMSA advanced 24%. Operating earnings for the beer division gained 19.4%. The beer business advanced thanks to higher export sales and higher prices. FEMSA's overall operating income grew 27.2%, and revenue rose 21.4% compared to the third quarter of 2008.

Long-term FEMSA investors who stayed with the company after its stock plunged last year have been rewarded with a strong comeback. Now, they have read a lot of headlines and heard a lot of rumors. Perhaps they can take comfort in a proverb that applies to drinking, deal-making, and everyday life: "There is many a slip betwixt cup and lip."

For further Foolishness:

• Big beer looks to be a good place to invest.
• Three ways to profit from foreign markets.
• Confession: How I Timed the Market.